Bargain buying finished

After enjoying a good recent rally on renewed fund interest, wheat futures have taken a step backwards as money inflows eased as the $US strengthened. The recent commodities rally has made both US wheat and corn expensive and stocks are building. Recent export levels are well down, with most of the business going to Black Sea exporters.

So why the rally? One theory is that soft commodities are relatively inexpensive compared to other commodities such as gold and oil. But this might be looking too far over the fence.

While they have taken a backseat in the latest rally, soybean demand looks to be holding the soft commodities complex together. The US announced another 1.35mmt in bean export sales last week and recent weekly export levels were at a new marketing year high of over 1.7mmt, showing that China is getting the beans shipped just as quickly as they are buying them. US soybean export commitments for 2009-10 are now 59% ahead of last year’s record-setting export pace.

On the US domestic front, recent data shows crushers have stepped up their pace due to profitable margins. Likewise, canola crushing in Canada is poised to hike higher as new capacity comes online. Canola prices need to remain firm to encourage Canadian farmer selling to ensure that deliveries meet higher crush demand.

So while the oilseed sector remains positive it is hard to see wheat and corn pulling too far behind. Corn has already lost plantings to beans in Sth America and the ethanol sector looks set for a positive period.

But soon the market will look to trade weather conditions in Sth America, where traders are expecting farmers to produce a massive crop to help offset growing demand for oilseeds.

The Brazilian crop (63mmt estimate vs 57mmt last year), is off to a great start and is about 65% sown. But in Argentina only about 35% of the Argentine bean crop is planted and yield potential could start to drift lower if plantings are further delayed. Recent rain, with more in the forecast, has eased concerns and will assist planting. With China strongly signaling they need more beans, look for markets to become more responsive to fluctuations in Sth American weather over the next few months.

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Prices hang in there despite bearish nearby fundamentals

International markets did a good job to hold at recent levels despite the weaker influence of outside markets (lower equities, energy and metals, and a higher $US), an escalation in harvest pressure and weak demand. Our prices were held in check by the strengthening $A and some light harvest selling.

Despite plentiful nearly supplies and the USDA lifting soybean yield estimates in its latest report, beans continue to provide strength to the entire grains complex.

Although it is difficult to gauge where the strength in the bean pit is coming from, there is growing talk of uncertainty regarding the new South American bean crop going into the ground given recent dryness in Argentina. Although this seems a tad premature, USDA has a big number pegged in for South American bean production as producers swing away from less profitable corn. The fact that crude oil has maintained a $US75-80/bll range for over five weeks may have breathed life into demand from the bio-diesel sector.

ProFarmer Canada called over the weekend and said market strength may have been aided by market chatter that the US corn crop in some areas is struggling with vomitoxin, a fungal by-product that can sicken humans and animals if ingested. The talk weighed on corn amid ideas it would cut demand for animal feed and helped lift other markets like CBOT soymeal (and in turn beans) on ideas that other products could be used as substitutes.

Canola is battling on two fronts; a Chinese ban on Canadian canola imports because of blackleg and restrictions on sales of canola meal into the US because of salmonella fears. As it stands, four out of six COPA (Canadian Oilseed Processors Association) plants in Western Canada are not allowed to ship canola meal to the US. Subsequently, distressed cargoes of Canadian canola meal are being sold into markets offshore.

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China plays games on canola

Some interesting debate is circulating on the China trade front as the country’s Nov 15 deadline looms where all shipments must be accompanied by a certificate stating absolute zero blackleg tolerance. Given the widespread nature of the disease, it is impossible for any supplier to attach such a guarantee.

As it stands today, the Chinese government is maintaining a hard-line position on this issue, which would mean no further canola sales will be made to China from Canada after Nov 15 - a country which last year represented a third of all Canadian exports.

Rumors circulating the export sector suggest all kinds of reasoning behind the sudden ‘hard to get’ nature of Chinese business; from legitimate Chinese concerns on blackleg to the Chinese playing a game to knock down canola prices, and a back door rationale to reduce built up Chinese canola/rapeseed stocks by restricting more attractively priced imports.

Whatever the reasons there is certainly a sense of underhandedness in the Chinese position and one has to question China's willingness to uphold the rule of law and contract in their dealings. Unfortunately, they are such a large global player, they cannot be ignored - and they know it.

The trade thinking is that a resolution could coincide with a scheduled visit to China on December 2-6. In the meantime, even if that emerges as the common view, the grain trade will likely gear up for a month waiting and/or defer shipment. It is highly unlikely in this waiting period that any more fresh business to China gets done until the green light is again lit.

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US interest rate rise in view

The weaker $US has been a key component of the rise in international grain values in recent months. But talk the US may have to raise interest rates - sooner, rather than later - helped support the dollar for a short time last week. In order to fund its ever growing debt, the US will need to lift rates to ensure US investments are competitive. The talk was spurred by another potential hike in Australian interest rates and speculation some European interest rates are set to ratchet higher.

As the $US attempted a recovery, US grain prices reacted with high volatility - nearly every uptick in the dollar was matched with a downtick in grain prices. And while we continue to talk about fundamentals - with ‘relatively’ comfortable grain stocks - it is movements in the ‘big’ dollar that is driving investment flows, grain and currency values.

In local industry news, CBH has auctioned off 70% of the core shipping space available for January to June 2010. Bidders had competed for the 4.895mmt of shipping capacity offered across Esperance, Albany, Kwinana and Geraldton. The auction took 42 rounds over three days. There were 15 participants who registered for the first auction, which covers the vast majority of the trade.

Viterra has confirmed it will rebrand the assets of ABB. All operations will be rebadged and other divisions will be renamed in line with existing Viterra structure. Signage will begin changing in coming months.
As it currently stands, container and dry bulk rates are at a very comparable level which should allow a good balance for grain exports which will spread the pressure over a greater number of service providers including container packers, bulk handlers, dry bulk operators, liner operators etc. There was interest in the container market for high protein wheat last week, but mainly out of east coast ports.

Owing to the slowest harvest on record, yield forecasts on US corn and soybean crops are being revised lower. Very light test weight might mean higher than expected usage. US ProFarmer reckons a notorious high-yield, low test-weight crop was 1992. The similarities to 2009 are very clear; late-planted, cool growing season, and high-moisture harvest.

In the first quarter of the 1992-93 marketing year, corn use (according to the Quarterly Grain Stocks Report) was steady with the previous year. In the second quarter of 1992-93, corn use surged 13% from year-earlier and use jumped 8% from year-earlier in the third quarter. Why? ‘Volume’ bushels are different to ‘weight’ bushels, which could lead to tighter-than-expected supplies of corn in the 2009-10 Quarterly Grain Stocks Reports.

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